Yes, this really was on the original release of the Little Mermaid VHS tapes. I worked in a video store and spotted it myself before others pointed it out. My understanding is that Disney quickly changed it on subsequent printing runs without changing any release date printing so that boxes that look like first releases and don't have a penis castle are, in fact, not first releases.

"You draw a bunch of spires that are tall and thin, eventually one's gonna look like a penis. It happens."
this was intentional or both Simba thinking of SEX in the clouds was a mistake and so is Aladdin blowing dust and the non dusty part spelled SEX or the little rescuers holding a penis in their bed of a can of sardines.